A company’s limited liability does not always protect the director from tax debts. We analyse when the Spanish tax authorities may derive liability to the director, what the Administration must prove and the main defence strategies.
A company’s limited liability does not always protect the director from tax debts. Under certain circumstances, the Spanish tax authorities can demand payment of the company’s tax debts directly from the director through a procedure known as subsidiary derivation of liability.
This procedure, governed by article 43 of the Spanish General Tax Act, is one of the main risks for directors of Spanish companies, particularly when the company is in financial distress or has ceased trading.
This article analyses when the Spanish tax authorities may derive liability to the director, what the Administration must prove and the main defence strategies.
What is director liability derivation?
Liability derivation is the procedure through which the Spanish tax authorities may demand payment from the director of a company of certain corporate tax debts when the requirements set out in the Spanish General Tax Act are met.
This is a subsidiary liability, which means that, as a general rule, the Spanish tax authorities must first formally declare the company insolvent before pursuing the director.
However, derivation is not automatic simply because a person holds the position of director. The Administration must prove that the legal requirements are met and follow the procedure established in article 176 of the Spanish General Tax Act.
When can the Spanish tax authorities derive liability to the director?
Article 43 of the Spanish General Tax Act sets out several grounds on which the director may be held liable for the company’s tax debts.
Directors for tax infringements (article 43.1.a LGT)
This is one of the most common grounds.
The Spanish tax authorities may derive liability where the company has committed a tax infringement and the director:
- Failed to take the necessary steps to comply with tax obligations.
- Tolerated non-compliance by employees or collaborators.
- Adopted resolutions that facilitated the commission of tax infringements.
In these cases, liability may also extend to the tax penalties.
That said, the Spanish Supreme Court has made clear that there is no automatic liability arising from the mere fact of being a director. The Administration must prove specific culpable conduct on the part of the director; a generic reference to their commercial duties is not enough.
Directors for cessation of activity (article 43.1.b LGT)
Another very frequent ground arises when the company ceases its activity leaving outstanding tax debts.
In such cases, the Spanish tax authorities may hold the director liable where they consider that the director:
- Failed to take the necessary steps to pay the debts.
- Did not pursue an orderly liquidation or the corresponding insolvency proceedings.
- Adopted decisions that caused the non-payment of tax obligations.
Unlike the previous ground, this type of derivation does not, as a general rule, extend to tax penalties, since the Act itself does not expressly provide for it.
Insolvency administrators and liquidators
The Act also provides for the subsidiary liability of insolvency administrators and liquidators where they fail to take the necessary steps to ensure compliance with the company’s tax obligations.
Their liability will depend on the functions actually performed during the insolvency proceedings or the liquidation.
Corporate structures used abusively
The Spanish tax authorities may also derive liability where they consider that certain companies have been used abusively or fraudulently to avoid the payment of tax debts.
In these cases it is essential to prove the specific requirements provided for in paragraphs g) and h) of article 43 of the Spanish General Tax Act.
What must the Spanish tax authorities prove?
One of the most important aspects of this procedure is that the burden of proof lies with the Administration.
Particularly in the cases under article 43.1.a, the Spanish Supreme Court has repeatedly held that the Spanish tax authorities must prove:
- The specific conduct of the director.
- Which obligations were breached.
- Why that conduct was decisive for the tax infringement.
- The existence of culpability.
It is not enough to state that the director had a general duty to comply with the company’s tax obligations.
The reasoning must be individualised and refer to the specific conduct of the director.
What procedure must the Spanish tax authorities follow?
Before deriving liability to the director, the Spanish tax authorities must respect all the safeguards provided for in the Spanish General Tax Act.
Among other steps, they must:
- Formally declare the debtor company insolvent, as a general rule.
- Follow the procedure set out in article 176 of the Spanish General Tax Act.
- Adequately state the reasons for the derivation ruling.
- Grant a right to be heard.
- Provide access to the administrative file and to all the documentation necessary to properly exercise the right of defence.
Failure to comply with these safeguards may result in the annulment of the procedure.
How to defend yourself against a director liability derivation?
Each file requires individualised study, although the lines of defence usually focus on the following aspects.
Prove the absence of culpable conduct
The Administration must prove what the director did or failed to do and how that conduct led to the infringement or the non-payment.
Review the reasoning of the ruling
Many rulings use generic wording that does not explain why the director should be personally liable.
Insufficient reasoning may lead to the annulment of the procedure.
Verify compliance with the procedure
It must be checked that the Spanish tax authorities have respected all procedural safeguards, including the declaration of insolvency, the right to be heard and full access to the administrative file.
Recommendations if you receive a liability derivation as a director
If you receive a notification from the Spanish tax authorities, you should act immediately.
At TAXAKALE we recommend:
- Do not assume the derivation is correct simply because you are the director.
- Request a full copy of the administrative file.
- Review the reasoning of the derivation ruling.
- Analyse the company’s situation and the origin of the tax debts.
- Check whether the Administration has actually proven the culpable conduct required by the case law.
- Check for procedural defects or limitation issues.
- Seek specialised advice before filing submissions or appeals.
A well-prepared defence from the outset can prevent significant personal liability.
How can TAXAKALE help?
At TAXAKALE we advise directors, shareholders and companies on tax liability derivation procedures, tax audits and appeals against the Spanish tax authorities.
We analyse every file from a legal and strategic perspective, checking whether the Administration has proven all the requirements set out in article 43 of the Spanish General Tax Act and whether it has respected the procedural safeguards recognised by the case law of the Spanish Supreme Court.
If you have received a director liability derivation or wish to prevent risks before the Spanish tax authorities act, our team can help you protect your assets and design the best defence strategy.